ENS Breakfast Presentation

1. ENS Breakfast Presentation Speaker: Jonathan Mort Company: Jonathan Mort Incorporated, Cape Town Topic: Best Governance Practice of Retirement Fund Investments Date: February 2011

2. Purposes of good governance • Ensure the promised benefits are delivered. • Ensure the benefits are optimal within the constraint of appropriate risk. • Costs of delivery of benefits are transparent and defensible. • Process of delivery of benefits can be trusted by stakeholders.

3. PF 130 requirements • Each fund must have an investment policy statement - • communicated to stakeholders • reviewed annually to ensure appropriate for members and needs of the • fund.

4. PF 130 requirements (cont) • IPS must contain - • who the fund’s investment advisers are • custodian • if the fund has SRI policy, and definition • whether fund investments are in the form of insurance policy or • segregated mandate • fund benchmarks • level of risk attributed to each asset class • whether fund exercises active ownership rights.

5. PF 130 requirements (cont) • Member investment choice. The board is responsible for appropriateness of portfolios, especially default. • Fund may not abuse balance of cost obligation. • Direct contractual relationship between fund and custodian.

6. Draft Regulation 28 • Principles based, premised on - • responsible investment approach to earn adequate risk adjusted returns for • member profile, fund liquidity needs and liabilities • emphasis on sustainability and environmental, social and governance • (ESG) factors. • Every fund must have investment policy statement.

7. Draft Regulation 28 (cont) • Investment principles (for a fund, its advisors and trustees) - • must comply with the spirit of Reg 28 • promote the education of trustees • consider BEE empowerment for service providers • ensure that the fund assets are appropriate for liabilities • before making an investment, and while invested – • do due diligence of investment risks (may use rating agencies, but not • in isolation) • consider sustainable long term issues of the investment, including • ESG factors. • These principles must be addressed in IPS.

8. Fund contractual arrangements • Board is not expected to have all the skills to administer the fund, and may obtain expert advice. • Especially important in relation to investment, actuarial and legal issues. • Very important that - • board understands fund’s investment objectives, and communicates these • clearly to stakeholders • these investment objectives are aligned with the governance purposes • (especially optimal benefits and defensible costs).

9. Fund contractual arrangements • Typically most funds simply outsource the investment responsibility. This means investment mandates are on the terms proposed by the asset manager :- • often not aligned with IPS • rarely reviewed by legal adviser • usually not aligned in terms of reporting periods • inadequate use of custodian (eg. reporting on what investments are held, how active ownership policy exercised) • no thought given as to the disadvantages of an investment policy over segregated mandate (no active ownership, counter-party risk, etc).

10. Risk management • Biggest risks in relation to a fund are usually investment risks. • Usually only investment risks considered are market risks, without regard for counter-party or contractual risks. • How responsible are boards in relation to fund investments? • importance of active ownership rights • negative screening of investments • contribution to macro economic stability • responsible investment manager choice and BEE imperatives.

11. Thank You.